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Graphical solution of monopoly output decision

Here is the information you need to answer the question. This information is taken from a graph. So you will need to draw the graph to answer the questions. The best level of output for the monopolist in the short run is 500 units and is given by point E where MR=MC. At Q=500, P=$11 and ATC=$8 so that the monopolist earns a profit of AF=$3 per unit and AFBC=$1500 in total. Showing the short run price and output determination by the monopolist, suppose that the average fixed costs of the monopolist increase by $5 and that its AVC is $6 less that the new ATC at the best level of output. a). What is the best level of output and price, b) what is the amount of profit or loss per unit and in total and whether it pays for the monopolist to produce. Note: ATC=AFC+AVC. After AFC increases by $5, ATC will increase by $5 (ATC curve moves up vertically by $5 for every output Q) and MC, D and MR stay the same. The AFC for 500 units is $6, in other words, the TFC is $3,000.

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See the attached file. The points are labeled as in the problem. You can see that the total profit is given by the intersection of the average total cost curve at the quantity indicated for MC= MR (point E). The new average cost curve is shown in blue. This gives us a new area of total profit or loss which ...

Solution Summary

Graphical solution of monopoly output decision